Full effects of OPEC decision felt, as Brent Crude oil price hovers at US40 a barrel

Full effects of OPEC decision.

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Commenting on the Brent Crude oil price dipping below US$40 a barrel, George Johnson, executive advisor in KPMG's oil and gas practice says:“The apparent discord among OPEC members continues to influence sentiment and oil prices. As the oil price hovers around US$40 a barrel, we’re seeing the full effects of the OPEC decision to maintain the production quota; adding further pressure to the fiscal budgets of oil producing countries, whilst inflicting further misery on the upstream industry as a whole.

“Despite a prolonged period of depressed oil prices, OPEC's track record of meeting the 30 million barrels per day quota over the last 12 months has been poor, with both Saudi Arabia and Iraq enjoying periods of record-breaking production. Going forward, cooperation among OPEC members is critical. If the Iranian situation is handled poorly, and both camps (OPEC and Iran) operate independently, we could see further price erosion.”

Commenting on the potential consequences of a prolonged lower oil price on exploration and production firms, Mark Andrews, UK Head of Oil & Gas at KPMG says:“As the oil price begins dipping below US$40 a barrel, and with no sign of a recovery in the short term, it is turning into the nightmare before Christmas for the sector. Companies with cashflow constraints or large debt burdens are concluding that weathering the storm of low prices may not be possible for the length of time now forecast. They are now considering M&A at valuations closer to those of buyers, who have until recently kept their powder dry, and we therefore expect an increase in deal flow across the sector.”

“The continued low price has also cemented the idea that ‘lower for longer’ is here to stay in 2016 and hence, the willingness, and ability, of companies to continue to operate marginal fields is reducing. In some instances, this will result in earlier than anticipated cessation of production and the acceleration of the associated decommissioning burden. The impact could be a domino effect, raising the very real possibility of significant resources being left in the ground, as the cost of maintaining ageing infrastructure mounts for certain mature, late life assets that remain active.”

Alan Kennedy, UK Lead Partner for Oil Field Services at KPMG adds:“While only a short term movement, the latest price fluctuation adds to the climate of uncertainty in the service sector at a time in the year when normally oil companies and their service suppliers are typically firming up plans and budgets for the forthcoming year. The wider concern is that this further price wobble and uncertainty leads to more inaction and delays, which in themselves contribute to the downturn in overall activity."

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